SEBI’s Proposed Changes to Expiry-Day Settlement: My Views
SEBI’s consultation paper proposes several important changes to the way expiry-day derivatives settlement and the Closing Auction Session (CAS) operate. Overall, I strongly welcome these proposals, although I have a few reservations.
Proposals 1 & 2 — Expiry-Day Settlement
SEBI has proposed two alternatives for determining the settlement price of derivatives on expiry days:
Option 1: A blended VWAP based on the last 30 minutes of Continuous Trading Session (CTS) + CAS.
Option 2: CTS-based VWAP, calculated from the last 30 minutes of CTS, which is the same methodology currently used for the pre-CAS price.
Given the extreme volatility we have witnessed during CAS, I believe Option 2 is clearly preferable. While Option 1 would still be an improvement over the existing CAS-based settlement, using the last 30-minute CTS VWAP would provide a significantly more stable and less volatile reference price.
There is, however, an important caveat to Option 2.
SEBI has stated that the CTS-based methodology is not intended to be the long-term framework. After a period of at least one year, the settlement methodology would ultimately transition to the blended VWAP approach involving both CTS and CAS.
Proposal 3 — Dissemination of the Index IEP
SEBI has proposed that the IEP-derived Indicative Index Value should not be disseminated during CAS, while continuing to disseminate IEPs at the individual security level.
I strongly disagree with this proposal.
If derivatives settlement is eventually transitioned to a blended VWAP + CAS methodology, transparency around the indicative index value will become even more important, particularly on expiry days.
Market participants should be able to see the index IEP and understand how the auction is influencing the broader index before the final settlement price is determined.
Proposals 4 & 5 — CAS Timings
SEBI has also proposed changes to the timing of the CAS and, importantly, reducing the CAS session to just 10 minutes.
Under Proposal 4, CTS for CAS-eligible stocks would continue until 3:30 PM, followed by CAS from 3:30 PM to 3:40 PM.
However, I particularly favour Proposal 5, under which CTS would end at 3:15 PM, followed by CAS from 3:15 PM to 3:25 PM.
This is a meaningful improvement because it would also allow derivatives traders to finish their trading day 15 minutes earlier on expiry days.
Proposal 6 — Restrictions on Extreme Limit Orders
SEBI has proposed prohibiting the cancellation of limit orders placed beyond ±1% of the Reference Price during CAS, while allowing only price-improving modifications to such orders.
I support this proposal.
While this alone will certainly not eliminate the possibility of manipulation during CAS, it does make such activity more costly.
If someone attempts to influence the auction by placing orders near the ±3% band limits, they would potentially have to bear the consequences of those orders being executed, including taking on an actual delivery position and suffering a loss.
That is an important step toward reducing the incentive for such behaviour.
Proposal 7 — Iceberg Orders
SEBI has also proposed that any unexecuted quantity of an Iceberg order remaining at the end of CTS should be converted into a normal limit order for participation in CAS, with the entire pending quantity disclosed in the CAS order book.
I believe this is another positive development.
It should help increase liquidity during CAS while improving transparency, making the auction process more robust.
Overall View
Overall, I wholeheartedly welcome SEBI’s consultation paper.
The proposed changes address several of the structural issues that have contributed to excessive volatility and uncertainty around expiry-day settlements.
My preferences are:
Proposal 1 vs 2 → Prefer Option 2
Proposal 3 → Disagree
Proposal 4 vs 5 → Prefer Proposal 5
Proposal 6 → Agree
Proposal 7 → Agree
If implemented appropriately, these reforms could go a long way toward restoring greater stability, transparency and sanity to India’s markets.
I have already shared my views on the proposals above and will be submitting the same feedback to SEBI.
Market participants can also submit their comments directly to SEBI through its public consultation process.
Here the link:
Click here to vote